What I Learned Reading The Coca-Cola Company (KO)’s Annual Report

“Other guys read Playboy. I read annual reports.”
— Warren Buffett

I’m not quite as fanatical as Warren, but I do enjoy digging into a company’s annual report to learn something new.

Over the next few weeks I’ll be reading the annual reports, called 10-Ks, of a pile of well-known companies, first page to the last. This week: The Coca-Cola Company (NYSE:KO).

Here are five things I learned from Coke’s annual report (which you can read here).

1. Inflation protection: less than some investors assume
One of the best ways to combat inflation over time is to invest in high-quality common stocks that can raise prices without cutting into sales. One of the most oft-cited examples of this is Coca-Cola, which enjoys a thick moat and deep brand loyalty. Indeed, Coke’s annual report writes: “We believe that, over time, we are able to increase prices to counteract the majority of the inflationary effects of increasing costs.”

But in the short and medium run, inflation can do a number on profits, even to a company like Coke. Take this quote from the company’s annual report (emphasis mine):

Our gross profit margin decreased to 60.3 percent in 2012 from 60.9 percent in 2011. This decrease reflected the unfavorable impact of continued increases in commodity costs during 2012. …

The following inputs represent a substantial portion of the Company’s total cost of goods sold: (1) sweeteners, (2) metals, (3) juices and (4) PET. The majority of these costs are included in our North America and Bottling Investments operating segments. The cost to purchase these inputs continued to increase in 2012 when compared to 2011, and as a result the Company incurred incremental costs of $225 million related to these inputs during 2012.

2. An international company with a small American subsidiary on the side
Ask a group of people to name famous American companies. Odds are they will mention Coke. It is one of the greatest American business stories of all time.

But America is only a small portion of Coke’s business. More than 80% of the company’s sales volume is conducted overseas:

Unit case volume outside the United States represented approximately 81 percent of the Company’s worldwide unit case volume for 2012. The countries outside the United States in which our unit case volumes were the largest in 2012 were Mexico, China, Brazil and Japan, which together accounted for approximately 31 percent of our worldwide unit case volume.